As the debate about dark liquidity takes off, experts on market structure are weighing in with their views on what’s necessary. Here are some highlights.
William O’Brien, CEO of Direct Edge, an ECN, stresses that displayed and non-displayed, as well as exchange and non-exchange, liquidity have long managed to exist together in ways that benefit investors. "There may be a need to adapt regulations to new technologies," he said, "but that doesn’t mean a re-architecting because of fundamental unfairness." He suggested that the way non-displayed orders now get worked in the market has "simply moved from sales traders shopping orders around on the phone to doing it on a server in an automated way."
Larry Tabb, founder of research firm TABB Group, points out that the current market structure debates are occurring against the backdrop of an extremely fragmented market in which liquidity is hard to find. He doesn’t think that limiting the ability of institutions to execute in the dark is a good idea. "The harder it is for institutions to get trades done in this marketplace of decimals and high-frequency trading, and machines trading against machines, the more people will hide their order flow until the overall economics change," he said. "When 500 shares becomes a big order, people just won’t display 500 shares."
In his view, the SEC hasn’t hit on the right incentives to display liquidity. "The last thing the SEC wants to do is open up a two-year debate on market structure," Tabb said. "But right now everything is fair game to be re-regulated."
Kim Bang, president of Bloomberg Tradebook, a broker-dealer and ECN, agrees that the hunt for size and off-board liquidity is the result of changes brought about, most immediately, by Reg NMS. "If the SEC analyzes how brokers and venues interact, and why brokers internalize flow through dark pools, they shouldn’t ignore access fees," he said. At the same time, he speculated that the SEC may "want to do the minimal amount of surgery to change the current market structure, since the markets are functioning remarkably well."